While derivatives, frontier markets, and technology are areas relatively few investors have the expertise, everyone seems to have an opinion about real estate. Unfortunately, this has resulted in the spread of a number of misconceptions, falsehoods, and myths. In this article, we examine the five most common myths and reveal the truth behind them.
Five Real Estate Investing Myths
Jul 2023Myth #1: There is sufficient more land to exploit
“Buy land, they're not making it any more” – a famous saying attributed to Mark Twain that has become a mantra for many real estate investors.
While this might seem to be a witty statement of the obvious, not everyone is aware of how true it is. And this is even notwithstanding the significant land reclamation from the sea and from lakes resulting from the explorations and discoveries of previous centuries – such as the Americas, Canada, and Australasia.
The Dutch, for instance, were the first to reclaim land on a large scale, starting in the 17th century, although smaller projects had begun as early as 300 years before. The Netherlands currently has approximately 7’000 square kilometers of reclaimed land, accounting for nearly 17% of its total land area. That being said, the availability of all this new land has had no negative impact on Dutch real estate values.
Netherlands’ existing house price index since 1995, where 2015=100
Source: Trading Economics
Meanwhile, in Hong Kong, land reclamation accounts for around 6% of the total area, yet the region has gained a reputation for the dynamic nature of its residential real estate market, which is characterized by both vibrancy and volatility, as shown in the chart below.
Hong Kong house price index since 1994, where 1997=100
Source: Trading Economics
In practice, shortages of development land are common, primarily due to an increasing number of legislative restrictions. In the United Kingdom, for example, planning laws have long been identified as the primary cause of the country’s annual housing shortfall of approximately 100’000 homes.
The mountainous landscapes of Switzerland create a natural land shortage, although planning laws implemented by each of the 26 cantons also play a significant role. While most of these laws primarily aim to reduce urban sprawl and environmental damage, their complexity and variety can be discouraging for developers.
Land supply in Hong Kong is deliberately limited. Indeed, the government owns all the land and limits its sales. This intentional restriction boosts prices and funds public spending without necessitating tax increases.
In light of the above, it is obvious that land, and thus real estate, is becoming increasingly limited. However, the underlying causes are not entirely natural. Some are man-made, which means they can be corrected.
Myth #2: Timing is everything
The average EU house prices increased by 45% between 2010 and early 2022, according to the headline of the article that contained the chart below.
House prices in the EU from 2010 till Q1 2022, where 2010=100
Source: Eurostat
However, if an investor had purchased a property in early 2014 instead of four years earlier, his profit would have been well over 50%. Conversely, if he had bought in mid-2011 and then sold in early 2014 as a result of being disillusioned with falling prices, he would have lost around 6% of value.
Assume you were thinking about investing in 2014 but were put off by the perceived economic outlook. As we know, Russia invaded and annexed Crimea, Ukraine in March of that year, casting doubt on a nascent EU recovery from the Great Recession (2007-09).
You may have continued to wait for your doubts to clear until property prices began to recover. On the other side, when that time came, you might have concluded it was too late and prices were too high.
In all of these hypothetical situations, the investors believed that timing was crucial, but that belief has come at a cost. The investor was playing a fool’s game, unaware that only a tiny minority of investors correctly time their entry and exit points. As an old adage goes, “it's not timing the market that matters, but time in the market.”
If you have the means to buy, ignore this myth and stop waiting, the perfect moment is, and has always been, now.
Myth #3: Real estate is a risk-free investment
Land scarcity is one of three main arguments in favor of real estate as a risk-free investment.
The other two arguments are based on the necessity of housing – we all need somewhere to live – and the fact that a home is a tangible asset. Whereas shares can potentially lose value, a house is a ‘hard’ asset that will always have a certain level of inherent value.
While these arguments set a minimum value on real estate, they are not the only ones to consider. Volatility is clearly evident in the Hong Kong price chart that is shown above. Similarly, although Swiss property prices have not been as volatile, they have also encountered some setbacks.
Switzerland's residential house price index since 1970, where Q1 2000=100
Source: Trading Economics
Assuming one invested in Swiss real estate in 1990, he would have had to wait almost 20 years for prices to recover sufficiently from the subsequent decline and reach the breakeven point.
Switzerland’s residential house price index vs. Hong Kong’s house price index
Source: Trading Economics
However, it's important to look at these findings in context. Let’s compare this chart with two others.
Bitcoin price since 2014 & 1-year US treasury bill yield (2012-2022)
Source: CoinDesk & Capital Com Online Investments Ltd
Bitcoin, the first asset, is widely regarded as being at the forefront of high-risk investments.
The second asset is T-bills, which are short-term US government bonds with maturity of one year or less. These bonds are widely recognized for their low-risk nature and are regularly used as a benchmark to assess the risk-adjusted returns of bond funds, among other purposes.
Clearly, while the valuations of Swiss and Hong Kong real estate may be volatile, it is incomparable to the volatility exhibited by this allegedly low-risk asset, let alone the unpredictable madness of cryptocurrencies. This explains real estate’s reputation as a low-risk asset, yet, as previously noted, real estate investing, like any other investment, carries some risk.
Myth #4: New is better than old
Real estate investors, as opposed to those who only want to own their homes, favor new-built houses and apartments over their pre-owned alternatives.
This is due to the fact that new homes are typically easier to buy and sell. They come with no “chain,” the buyer doesn’t have to sell his previous property before buying, and the seller doesn’t need a replacement house before selling.
Newer properties are also more energy-efficient, easier to maintain, and subject to stricter regulations on these matters compared to older houses. In many countries, developers are required to remedy faults at their own expense for a specified period of time after the initial sale of a new property.
However, there are several disadvantages to buying new houses and apartments. Mortgage lenders generally favor older buildings with a documented history of previous defects and repairs and located in areas with an established valuation track record. New-builds, for the most part, are often located in newly developed communities with no such track record. As a result, loan-to-value (LTV) ratios may be significantly lower.
To top it off, new homes frequently bring in a premium price that may not be sustainable upon resale for several years, due to their higher efficiency and “ready-to-use” nature. Existing homes, on the other hand, may have greater charm and can easily be customized to the owner's preferences. Some may be “fixer-uppers,” requiring extensive modernization. Buyers can add significant value to their investment in both cases.
Regardless, housing in Switzerland is currently in extremely low supply as a result of a steadily increasing population (a nearly 28% rise since 1990), a trend towards smaller properties, and an insufficient number of new apartments and houses being built.
So, new or old? While both can offer value, the answer ultimately depends on each investor’s individual goals and preferences in addition to the availability of the property (whether new or old).
Myth #5: High cost
The perception that real estate is a significant financial commitment is as obvious as land scarcity. Even for the ultra-wealthy, homes are often the highest expense they incur throughout their lives.
However, that has been true throughout modern mankind’s history of homeownership. Several well-tested solutions have been around for a long time. In addition to traditional mortgage financing, co-ownership is a well-established approach that differs from fractional ownership (a more common alternative for investors with limited capital, as opposed to homeowners). Co-ownership involves investing in shares issued by a company that owns the property or multiple properties.
Le Bijou, for example, operates on this principle, offering investors access to a diverse selection of Swiss real estate opportunities. In addition, individuals who take advantage have access to various benefits, such as various top-notch services of family office quality, exclusive event invitations, and more.
Hence, it is not a myth or a problem that real estate entails significant costs. Instead, there are various established solutions to fit different financial circumstances and investment preferences.
Myths and mistakes
Warren Buffett, the renowned chairman of Berkshire Hathaway, Inc. and widely regarded as one of the world's most successful investors, famously said: “Risk comes from not knowing what you're doing.”
By debunking these five real estate myths above, we have shown that, like any other investment, real estate comes with risks and challenges. Nevertheless, real estate also offers a wide range of exceptional rewards. Doing your own research before making any investment-related decisions is a key to understanding and minimizing risks while getting the desired rewards.
By conducting your own research and learning, you can avoid making one of the most significant mistakes of all: blindly following myths and failing to ask questions.
